1. Field of the Invention
The present invention relates generally to trading contracts and operating exchanges.
2. Description of Prior Art and Related Information
A “securities exchange” refers to any trading apparatus that trades securities. Securities provide a unilateral right to an investor. Examples of securities are common stocks, preferred stocks, limited partnerships, tenants-in-common, promissory notes and industrial bonds. Examples of securities exchanges are the New York Stock Exchange and NASDAQ. The prices of securities are positive or zero because securities do not impose a liability on the holder of the security, so counterparty risk is not a factor. Accordingly, securities exchanges do not require investors to provide to the exchange collateral or margin accounts. Tens of millions of individuals invest in securities on the world's securities exchanges.
A “futures exchange” refers to any trading apparatus that trades contracts that may obligate a trader to make an additional payment in the future. The Commodity Futures Trading Commission (CFTC) regulates some types of futures trading in the United States.
Counterparty risk is the risk that a party to a contract will not perform as it is obligated to perform by the contract. Unlike securities exchanges (which do not have a claim to further payment by traders), futures exchanges must manage counterparty risk. A basic tool to reduce counterparty risk has been to require collateral from each counterparty. Specifically, traders on futures exchanges today generally are required to maintain margin accounts. Margin accounts can be wiped out in a matter of hours, however; to reduce this threat, a futures contracts exchange that requires traders to maintain margin accounts also imposes “daily price change limits” on the contracts listed on the exchange. Trading on a futures exchange has been costly because of the costs of counterparty risk measures, including risk identification, risk transfer, risk reduction and risk quantification as well as unmitigated counterparty losses.